Between Lots of Rocks and Hard Places: Greece's Bad Options

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Kostas Tsironis / AP

Prime Minister Lucas Papademos arrives for a meeting in Athens with the leaders of the three parties backing Greece's coalition government on Feb. 5, 2012

The leaders of the three parties in Greece's coalition government are expected to sign off on tough new austerity measures on Feb. 7, including a controversial reduction in the minimum wage, in exchange for about $171 billion in new bailout loans. If the leaders sign, then a separate bond-swap deal with private creditors to cut Greek debt by at least 50% will also come through.

But Greek politicians, already hated by the public for agreeing to earlier austerity measures, are actually faced with two disastrous choices: sign the deal and face the wrath of antiausterity voters in spring elections, or don't sign and send the country into a chaotic default, which could lead to an exit from the euro zone.

International lenders, including the E.U., the European Central Bank and the International Monetary Fund (IMF), are just as despondent. Euro-zone leaders say they've lost patience with the Greek delays, but they're also trying to process the likelihood that austerity may be backfiring on everyone. Austerity was supposed to bring down debt to sustainable levels in Greece, Portugal and Ireland, but instead debt has increased in all three countries. Greece's debt level is especially troubling: it rose to 159% of GDP, according to Eurostat, the E.U.'s statistical agency. That makes the IMF's goal of reducing Athens' debt to 120% of GDP by 2020 seem out of reach, analysts say. It is almost like Hercules and the hydra: lop off one problem, and more grow in its place.

"There is now broad agreement among euro-zone donors and the IMF that Greece will not be able to squeeze more revenue out of an economy that is in its fourth year of recession," wrote Katinka Barysch, deputy director of the London-based Centre for European Reform, in a recent assessment. Added Paul McNamara, investment director at GAM, an asset-management firm in London: "Greece is in a horrible position because it was already a terribly uncompetitive economy."

Meanwhile, beyond the statistics, ordinary Greeks are suffering badly. Even the IMF, an organization that's not known for its human warmth, acknowledged as much. "Much of the criticism from abroad overlooks the fact that Greece has done a lot, at a great cost to the population," the IMF's chief of mission, Poul Thomsen, recently told the Greek daily Kathimerini. He was speaking about the wage and pension cuts and tax hikes that have angered Greeks so much that some have protested violently outside Parliament.

Most Greeks don't protest and riot; instead, they have been waiting anxiously for the sacrifices to bear some fruit so the country can have some hope again. As the unemployment rate has doubled to nearly 19% and companies are increasingly becoming so broke that they can't pay their workers, many Greeks are frustrated with other Europeans' saying they're just not trying hard enough. "They say this even as we have become the homeless man of Europe," says Kostas Galitsakis, 36, a sports journalist in Athens who works at a private TV station that hasn't paid him, or any of its workers, for months. "It's the uncertainty that's wearing me down. It's impossible to plan for the future when you don't know if Greece will default or be forced to leave the euro behind and go back to the drachma. It's very hard not to fear the worst."

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